Chapter 11. Getting a Bigger Piece of the Action For You
Finally, we will now focus on just you. An Eat-What-You-Kill pay system gives you the opportunity make much more money. How do you go about getting a plan for yourself? There are six steps:
- Start opening your boss up to the idea of Eat-What-You-Kill compensation with the facts and studies covered in Chapters 1 and 2 (or better yet, give her/him a copy of this book).
- Figure out the value drivers you control.
- Look back at past performance to determine the normal range of performance.
- Calculate the value created for the company by performing 10% better than the normal range.
- Recommend to your boss a new incentive that kicks in only when you go 10% beyond your normal range, but gives you 40% of the value you create. Why 40%? There are three reasons.
- First, 50% looks too greedy.
- Second, the company is a business after all and needs a profit cushion to make sure they earn a profit (and a 60% cut is reasonable).
- Third, 40% is usually enough to create a great incentive for you (if it is too high, you either can start lower or negotiate down from 40%). It is always good to start high with your boss.
- Recommend to your boss that your peers get the same Eat-What-You-Kill incentives. This is fairer and prevents opposition from your peers.
Let’s give some examples of steps 2-5.
1.1. Implementing EWYK: Department Store Buyer
Say that you are a buyer for a small department store. The company measures you and your two peers by how much gross profit the items you buy generate. You and your peers’ clothing lines have historically brought in the following profit in each of the last 3 years: Buyer’s Historic Profits You Peer A Peer B Last year $1,000,000 $1,100,000 $900,000 Year before $1,200,000 $1,300,000 $1,100,000 Two years ago $800,000 $900,000 $1,200,000 You could suggest the following compensation plan:
- No EWYK bonus unless profit goes above $1,400,000 (higher than the normal range of up to $1,300,000). No one has ever hit that level.
- For profits beyond $1,400,000, the incremental profits are shared 60:40 with the store getting 60%. In other words, if you bring in $1,500,000, there is a $100,000 excess. Of the excess, you get $40,000 and the store gets $60,000.
1.2. Implementing EWYK: Production Line Quality Control Case Example
Say that you are a quality assurance person on a production line. Your team is responsible for minimizing the defect rate for the entire line. Say the defect rate is 1 to 2 per 50 and the average defect requires $200 to correct once it leaves the line. If your line produces 200,000 units per year, the total defect cost is $800,000 to $1,600,000 per year. You might suggest that the EWYK bonus only kicks in if defect costs go below $700,000, and any reductions below that are 40% shared among the quality assurance team. You can think up various ways to share the money (equally, by ratio of salaries, by team vote, by team leader decision, etc.). You get the idea. It is simple, though radical for some old-timers. However, simple and good ideas always have enemies. Expect managers and other employees to raise obstacles ranging from “No fair” to “Incentive bonuses don’t work”. Reply with the arguments detailed in this book. Refer them to the relevant studies cited in the Appendix. Check out EatWhatYouKill.com for more help in making things happen. Remember that the path to more success for you and your company is linking your pay to value you create. Top-performing companies pay for value creation. Top-performing companies motivate and retain good employees by giving them a piece of the action. Top-performing companies incent people to do the right thing– create value for their company. And by doing all of the above, companies that pay for value creation tend to outperform those that do not. This is just common sense.